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Compass: Governor's plan is the wrong way to an gas project

As someone who long has argued in favor of state co-investment in the development of Alaska's oil and gas resources, I was hopeful last fall when the state released the "Alaska North Slope LNG Royalty Study."

With references to the need for "alignment" between the state and the industry and analyses of successful projects elsewhere in the world involving state participation, I believed that the Governor potentially was positioning Alaska to play a more active role in the development of its own resources, much in the same way as do some large landholders in the Lower 48 states and other governments that are resource owners.

The "Heads of Agreement" and related legislation (Senate Bill 138) that the Governor introduced at the start of the session, however, fall well short of the mark. Instead of adopting global best practices taken from successful LNG projects, the governor's proposal is a confusing patchwork that is fraught with risk and even if it works perfectly, would not advance the goal of enabling the state to help drive increased activity where Alaska needs it most - in the upstream development of its oil and gas resources.

Among others, successful world scale LNG projects where the government owns the resource usually share two important characteristics.

First, the participants own the same proportionate share in the project throughout the value chain, from the source of production through the LNG liquefaction facility, which, for the Alaska project, is currently proposed to be located at Nikiski. This aligned approach eliminates the potential for project killing disputes arising out of different ownership interests in different segments. Because all owners own the same percentage of the project throughout, they are indifferent - and thus, don't argue about - situations where increased costs in one segment are necessary to achieve lower overall costs in others. With alignment, the partners focus simply on achieving the lowest overall cost.

Second, the government participant has a voice and assumes an active, proportionate financial responsibility in the upstream end of the project. As happens in Norway and other countries that also own - and rely financially on -- their oil and gas resources, that enables the government to understand the economics of potential opportunities, and to help bring attention to and drive investment in those opportunities when otherwise being overlooked or underfunded. Doing so is important to help continue to fill the pipe - and in Alaska's case, maintain revenue - as existing resources are produced.

The Heads of Agreement and related legislation include neither of those. For largely unrelated reasons, TransCanada is interjected into the middle of the project in one segment but not others, clearly setting up the potential for project derailing disputes about which segment should bear costs and receive revenues.

And disappointingly, while the Heads of Agreement provides that Alaska will receive a share of the gas in lieu of taxes and royalty, the state remains in a passive role in the upstream, accepting the results of whatever development other partners decide entirely on their own to pursue, or not.

The state's decision to co-invest in the Alaska LNG project presents a potentially game changing opportunity for Alaska to reposition itself to take advantage of global best practice for resource owning governments. Last fall's Royalty Study began to show the way toward that goal. The Heads of Agreement is a step backwards from that and if enacted as proposed, potentially consigns Alaska to continuing as a backwater oil and gas province, dependent, as Blanche Dubois put it in "A Streetcar Named Desire," on the "kindness of strangers."

Instead of hiring more consultants the Legislature instead should be inviting representatives of other, similarly situated governments to talk about their successes. The idea behind Norway's now world leading sovereign fund was borrowed initially from Alaska's earlier Permanent Fund. Alaska should not be shy about similarly considering good ideas from others.

Brad Keithley is president of Keithley Consulting, LLC, an Alaska-based firm focused on oil, gas and fiscal policy consultancy, and founder of Alaskans for a Sustainable Budget.